On wealth, income, and savings inequality in the US; Also, the “some college” trap and value of technical colleges

This is a discussion post I wrote on 2018-04-11 for Dr. Judit Szente‘s course, EDF 6855: Equitable Educational Opportunity & Life Chances: A Cross-National Analysis, at University of Central Florida.

On wealth, income, and savings inequality in the US

The United Nations (2017) sustainable development goals seek to promote employment and income equality, particularly among disadvantaged or at-risk groups in developing countries (Goals 8 and 10). Education is important toward employment opportunities, along with the eradication of bad forms of child labor, subsistence or forced labor, and the promotion of economic development at all levels including availability of loans and other financial services to small businesses (Goal 8). Goal 10 focuses on addressing income inequality, including via a powerful antecedent—different levels of opportunity for the wealthy versus the poor. To address this, the UN suggests focusing on increasing incomes for the lower 40% of earners in developing countries, along with policies of social protection, inclusion, and progressive taxation. At the macro level, the UN suggests least developed and developing countries be given preferential treatment in matters of world trade and aid.

When reflecting on these issues, I like to compare and contrast with the situation in Florida and the US as a whole. It may be surprising to some that Florida allows several forms of child labor. Officially, children are permitted to deliver newspapers at Age 10, work on farms at Age 12, and work in many other settings (e.g., grocery stores) at Age 14. Fourteen year olds can work up to 15 hours per week during the school year and up to 40 hours per week during school breaks. I started working for pay at a public library at Age 15, and it was a source of fulfillment and satisfaction for me. However, at the same time it can be distracting from one’s academic work, particularly for children who have familial and financial stress at home. These forms of child labor are much better than young children working in sweatshops or factories full-time for low wages at the expense of their studies and family life, of course.

Income inequality is important, but the U.N. sustainable development goals are unfortunately loath to consider wealth and savings inequality. To aid comparison and contrast to the US, I refer to Saez and Zucman’s (2014) meticulous analysis of U.S. wealth inequality from 1913 to 2012, which refers to accumulated assets rather than inflows (income) for a particular year. What they have found is a U-shaped curve whereby wealth inequality was high in the 1920s, declined in the Great Depression and thereafter, and then has roared back since the 1970s, particularly with the Great Recession that began in 2008. Of particular note is that the top 0.1% almost fully account for this inequality—the 160,000 American families with net worth north of $20 million. In fact, wealth inequality is a problem of much greater magnitude than income inequality. Not only has the income rate of the top 1% been increasing faster than the lower 99%, but their wealth differential and savings rates are much higher, too.

The wealthiest Americans are a triple threat—in recent decades, their increase in earnings rates are higher than the lower 99%, they save more, and their accumulated wealth produces more wealth. Looking at problem of saving, Saez and Zucman (2014) find that Americans in the lower 90% of wealth save an average of 3% of their income, while those in the 91st–99th percentiles save 15% of their income (five times more!), and the top 1% save 20–25% of their income. For the lowest 90% of American wealth holders, savings rates declined steeply beginning in the 1970s, fueled by an explosion of consumer debt particularly in home mortgages—in fact, in 1998—2008, their savings rate was negative, meaning they took on more debt than assets. Further perpetuating their wealth inequality, about half of Americans have no exposure to stocks, which are vital to growing one’s wealth.

Wealth inequality is a big problem in the US, along with income and savings inequality. In developing countries, the consequences are dire. However, even in the US, inequality disenfranchises over half the population. It is quite challenging to personally fight inequality in developing countries without income and assets. The idea I have recently been toying with is a three-pronged approach that focuses on financial education for Americans, laws and regulations that compel employers and financial institutions to conduct business in ways that do not unfairly disadvantage the working class (e.g., comprehension rules; Willis, 2017), and a movement that encourages prosocial behaviors among employers, financial institutions, corporations, and governments that benefit the poor, going beyond what laws and regulations can do. While I will work only on one of three of these prongs (financial education), the others are equally important legs of the stool.

This is a reply to another student’s discussion post I wrote on 2018-04-11 for Dr. Judit Szente‘s course, EDF 6855: Equitable Educational Opportunity & Life Chances: A Cross-National Analysis, at University of Central Florida.

On the “some college” trap and value of technical colleges

The idea that not everyone needs or would want to go to college for a traditional 2- or 4-year degree is an idea whose time has come in the US and elsewhere, in my opinion. Massive numbers of postsecondary students have “some college”—they earned credits but no degree, and yet they have the debt and reduced GPA with none of the benefits. Often, they ended up failing due to competing demands of financial stress, work, and childcare, while being unaware of withdrawal deadlines and future impacts. A student with “some college” and a low GPA, in the US, is in many ways disadvantaged compared to a high school graduate with no college credit, in a similar manner to how those with derogatory marks on their credit reports are disadvantaged compared to those with no information on their credit reports. If they go back to college, they may not be admitted or may not qualify for financial aid due to their pre-existing low GPA, and credits previously earned may become unuseful.

Vocational schools, on the other hand, train individuals more quickly in profitable fields such as welding, dental assisting, or information technology, without onerous general education requirements or multi-year programs of study. In the US, the word “college” has more respect and notoriety than “trade” or “technical” schools. Public vocational schools in Florida have recently taken advantage by rebranding themselves as colleges, such as Orange Technical College. It behooves young Floridians to know about technical colleges, along with the certificate offerings of their friendly neighborhood state colleges.